Asset Pricing II

Latest update: October 30, 2024.

Office: D521 (Building 2)

Office hours: by appointment

Course Description

This course aims to provide a comprehensive introduction to the empirical challenges of dynamic asset pricing models. It covers model specification, econometric methods for estimation and inference, and also a discussion of affine processes. Moreover, we also study the most relevant empirical literature from the last decades, both in terms of methodology and in terms of findings. By the end of the course students will be able to carry out an empirical study in the area of asset pricing.

Students require a solid knowledge in statistics and econometrics, as well as in theoretical asset pricing models.

Assessment

The final grade is computed as follows:

• Empirical work: 50%

• Presentation of a research paper from the area of empirical asset pricing: 50%

For the empirical work, students can use any econometric software package (R, Matlab, Gauss, etc.).

Syllabus

1. Introduction (slides)

   • Readings:

     • Singleton (Chapter 2)

2. Model Specification and Estimation Strategies (slides)

   • Main topics:

     • ML, LLP, and GMM estimators

     • Large-sample properties of estimators

     • MCMC estimation

     • Kalman filtering

   • Readings:

     • Singleton (Chapter 2 and 3)

     • Johannes, M., and N. Polson, 2005, MCMC for financial econometrics, In Y. Aït-Sahalia and L. Hansen (Eds.), Handbook of Financial Econometrics. Amsterdam: Elsevier-North-Holland.

     • Hamilton, J.D., 1994, Time Series Analysis. Princeton University Press.

     • Hansen, L., 1982, Large sample properties of generalized method of moments estimators. Econometrica, 50, 1029-1054.

     • Sebestyén, Sz., 2019, Linear and non-linear Kalman filtering: Theory and applications in economics and finance. Unpublished and incomplete. (pdf)

3. Affine Processes (slides)

   • Main topics:

     • Continuous-time affine processes

     • Discrete-time affine processes

     • Transforms for affine processes

     • Estimation of affine processes

     • Term structure models

   • Readings:

     • Singleton (Chapters 5 and 12)

     • Dai, Q., and K. J. Singleton, 2000, Specification Analysis of affine term structure models. Journal of Finance 55, 1943-1978.

     • Duffie, D., J. Pan, and K. J. Singleton, 2000, Transform analysis and asset pricing for affine jump-diffusions. Econometrica 68, 1343-1376.

     • Duffie, D., and R. Kan, 1996, A yield-factor model of interest rates. Mathematical Finance 6, 379-406.

     • Duffie, D., D. Filipovic, and W. Schachermayer, 2003, Affine processes and applications in finance. Annals of Applied Probability 13, 984-1053.

4. Stochastic Discount Factors and Factor Models (slides)

   • Main topics:

     • Stochastic discount factors and DAPMs

     • Consumption-Based DAPMs

     • Stochastic discount factors and factor models

   • Readings:

     • Singleton (Chapters 8, 10, and 11)

     • Hanse, L. and S. Richard, 1987, The role of conditioning information in deducing testable restrictions implied by dynamic asset pricing models. Econometrica 55, 587-613.

     • Hansen, L. and K. Singleton, 1983, Stochastic consumption, risk aversion, and the temporal behavior of asset returns. Journal of Political Economy 91, 249-265.

     • Roll, R., 1977, A critique of the asset pricing theory's tests: Part I. Journal of Financial Economics 4, 129-176.

     • Cochrane, J., 1996, A cross-sectional test of an investment-based asset pricing model. Journal of Political Economy 104, 572-621.

     • Fama, E. and J. MacBeth, 1973, Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 81, 607-636.

     • Shanken, J., 1992, On the estimation of beta-pricing models. Review of Financial Studies 5, 1-33.

     • Gibbons, M., 1982, Multivariate tests of financial models: A new approach. Journal of Financial Economics 10, 3-27.

     • Banz, R., 1981, The relationship between return and market value of common stocks. Journal of Financial Economics 9, 3-18.

     • Chan, L., Y. Hamao and J. Lakonishok, 1991, Fundamentals and stock returns in Japan. Journal of Finance 46, 1739-1789.

     • Rosenberg, B., K. Reid and R. Lanstein, 1985, Persuasive evidence of market inefficiency. Journal of Portfolio Management 11, 9-17.

     • Fama, E. and K. French, 1992, The cross-section of expected stock returns. Journal of Finance 47, 427-465.

     • Fama, E. and K. French, 1993, Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 23-49.

     • Jagannathan, R. and Z. Wang, 1996, The conditional CAPM and the cross-section of expected returns, Journal of Finance 51, 3-54.

     • Vassalou, M. 2003, News related to future GDP growth as a risk factor in equity returns, Journal of Financial Economics 68, 47-73.

Textbooks

• Singleton, K. J., 2006, Empirical Dynamic Asset Pricing, Princeton University Press.